Tuesday, April 07, 2009

NY Fed Model Suggests Economic Recovery Has Started, and Recession Will End This Year

According to the New York Fed, "Research beginning in the late 1980s documents the empirical regularity that the slope of the yield curve is a reliable predictor of future real economic activity."

This afternoon, the New York Fed released its latest "Probability of U.S. Recession Predicted by Treasury Spread," with data through March 2009, and the Fed's recession probability forecast through March 2010 (see chart above, click to enlarge). The NY Fed's model uses the spread between 10-year and 3-month Treasury rates (currently at 2.61%) to calculate the probability of a recession in the United States twelve months ahead (see chart below of the Treasury spread).

The Fed's data show that the recession probability peaked during the October 2007 to April 2008 period at around 35-40%, and has been declining since then to less than 10% for December 2008 and January 2009. Looking forward through 2009, the Fed's model shows a recession probability of only about 1% on average through the next 12 months, and below 1% by the end of the year (0.82% in December 2009). By March of 2010, the recession probability will be only 0.53%, close to the lowest level since mid-2005.

Further, the Treasury spread has been above 2% for the last 12 months, a pattern consistent with the economic recoveries following the last six recessions (see chart above).

Bottom Line: My reading of the New York Fed's Treasury spread model suggests that an economic recovery is probably already underway, and the Fed's model predicts the end of the recession in 2009.

8 Comments:

At 4/08/2009 6:31 AM, Blogger 1 said...

I don't want to pooh pooh the New York Fed's work but I have to wonder if federal government with its pandering to home defaulters might possibly skew the results...

The following is from the always questionable Reuters: Mortgage delinquencies soar in the U.S.

More U.S. consumers are falling behind on their mortgages, an indication that the housing market has yet to hit bottom, a top credit bureau executive told Reuters.

Dann Adams, president of U.S. Information Systems for Equifax Inc, reported that 7 percent of homeowners with mortgages were at least 30 days late on their loans in February, an increase of more than 50 percent from a year earlier.

He also said 39.8 percent of subprime borrowers were at least 30 days behind on their home mortgage loans, up 23.7 percent from last year.

(there's more)

 
At 4/08/2009 8:07 AM, Anonymous Anonymous said...

1) Yield curve is officially in bizarro world with the Fed deciding to lower rates to 0 and buy treasuries. Can we really rely on the UST market anymore??

2) This NY Fed model only goes back to 1960, according to these charts. They capture all of about 6 data points. The current recession is clearly quite different than past recessions of the last 50 years. Everything about our current predicament has been wildly different than the recessions since 1960, so I'll continue to believe that this model isn't infallible.

 
At 4/08/2009 10:04 AM, Blogger ExtremeHobo said...

When are we gonna see the Carpe Diem stock picks ala Jim Cramer's Mad Money?

 
At 4/08/2009 11:49 AM, Anonymous Fred said...

"Why this will not be a normal cyclical recovery"
By Roger Altman, former Deputy Treasury Secretary

The rare nature of this recession precludes a cyclically normal US recovery.
...
What is unusual is that this is a balance-sheet driven recession, centred on the damaged financial condition of both households and banks. These weaknesses mandate sub-normal levels of consumer spending and overall lending for about three years.

In contrast, most postwar recessions had a different sequence – rising inflationary pressures, a monetary tightening to counter them and, then, a slowdown in response to higher interest rates.
...
Consumer spending, however, has approximated 70 per cent of US gross domestic product for the past decade and dominates our economy. But household balance sheets will not be rebuilt soon. Home values will keep falling through mid-2010 and there is no precedent for equity markets, still down 45 per cent from their peak, to make those losses up in just two years. It is illogical, therefore, to expect a full snap-back in the consumer sector in 2010 or 2011.
...
Funds from the Troubled Asset Relief Program are only replacing lost capital, not increasing it. When might they end? With key categories of toxic assets still losing value, the answer is: not soon. The scale of lending needed to support a normal cyclical recovery will not materialise.
...

http://www.ft.com/cms/s/0/3d89a930-220d-11de-8380-00144feabdc0.html

 
At 4/08/2009 11:54 AM, Blogger Uvulapie said...

Left to it's own it seems like the economy might recover even this year. However Congress and Obama insist on manipulating markets to the point that I fear all this recovery is going to go down the tubes.

 
At 4/08/2009 11:58 PM, Blogger ccarter84 said...

I think we've seen this before where models don't go back far enough or are too limited in scope. But hey, if they're right, all the better I guess. Too bad they're not.

 
At 4/09/2009 6:29 AM, Anonymous geoih said...

I have to wonder if their model includes the probability for massive inflation based on the expansion of credit and increase in deficit spending.

 
At 4/09/2009 1:38 PM, Blogger Problem Is said...

What about the Fed buying $300 billion in longer-term Treasury notes over the next 6 months to influence the yield curve. Then announcing the yield curve says the "recovery" has started?

Can you bond guys explain to me the overall influences of the Fed purchases on the yield curve? Strong influence, marginal influence?

To a layman (me), it sounds like a used mortgage salesman yelling "Now is the time to buy! Don't be left behind! Limited time offer! Act today!"

Oh yeah... Bernanke is a used mortgage salesman...

 

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